ECB unveils steps to battle low inflation
Print Edition
THE European Central Bank launched a raft of measures yesterday to fight low inflation and boost the eurozone economy, cutting rates, imposing negative interest rates on its overnight depositors and offering banks new long-term funds.
The ECB cut all its main rates to record lows in a drive to fight off the risk of Japan-like deflation and bring down the euro’s exchange rate. For the first time, it will charge banks 0.1 percent for parking funds at the central bank overnight.
It stopped short of large-scale asset purchases known as quantitative easing for now, but ECB President Mario Draghi said more action would come if necessary.
Draghi outlined a four-year 400-billion-euro (US$544.86 billion) scheme giving banks that have been holding back credit due to looming stress tests an incentive to increase lending to businesses in the eurozone.
“Now we are in a completely different world,” Draghi told a news conference, citing “low inflation, a weak recovery and weak monetary and credit dynamics.”
The package, adopted unanimously, was aimed at increasing lending to the “real economy,” he said.
Other steps included extending the duration of unlimited cheap liquidity for eurozone banks, injecting about 170 billion euros by stopping tenders that withdrew funds spent on past government bond purchases, and preparing for possible future purchases of asset-backed securities to support small business.
Projections published by the ECB showed inflation would be 0.7 percent this year, 1.1 percent next year and 1.4 percent in 2016, a downward revision and far below the ECB’s target of under but close to 2 percent.
“If required, we will act swiftly with further monetary policy easing,” he said, adding that the policy-setting Governing Council was unanimous in its commitment to use unconventional instruments if needed “to further address risks of too prolonged a period of low inflation.”
French President Francois Hollande, who has been calling for months for ECB action to weaken the euro’s exchange rate, which Paris argues is holding back economic recovery, welcomed its decision.
German Chancellor Angela Merkel declined comment, noting that the ECB took its decisions independently of governments. Finance Minister Wolfgang Schaeuble said low interest rates were not a long-term solution.
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